Where to Find the Best Canadian Small-Cap Stocks
One of the fun activities that comes with being a small-cap stock analyst is searching for new stocks to cover for subscribers to Cabot Small-Cap Confidential. I’m not limited to certain sectors or geographies; I can cover Canadian small-cap stocks, U.S.-listed small caps or European small caps. If a company looks good, it’s fair game!
I’ll often turn to the Canadian stock exchanges to see what’s going on just north of the border. When looking in Canada, investors can lump stocks into one of two large buckets.
The first bucket is the Vancouver Stock Exchange. These stocks usually have market caps under $250 million and often trade for less than a dollar. You’ll find a lot of mining and oil and gas stocks in Vancouver, but some technology stocks too. For investors looking to narrow this universe down a little more they can start with the Venture 50 list.
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The Venture 50 list is published at the beginning of every year by the TSX Venture Exchange. It covers the exchange’s 50 best-performing stocks over the last calendar year based on three equally weighted criteria: market cap growth, share price appreciation and trading volume amount. Additionally, each company must have a market cap of over $5 million and a share price greater than $0.25.
The second bucket is the Toronto Stock Exchange. These are comparatively more established companies and there is a wider selection of stocks to choose from. Some companies go public directly on the Toronto Stock Exchange, while others uplist from Vancouver once they satisfy the listing requirements.
There are more than a few Canadian small-cap stocks worthy of your attention right now. Here are three I think look particularly compelling right now.
These Three Canadian Small-Cap Stocks Are Looking Good
Canadian Small-Cap Stock #1: goeasy (GSY.TO, EHMEF)
Note: All prices stated below are in Canadian dollars (CAD$), unless otherwise noted.
Canadians looking for alternative, non-prime financing solutions, or a little help leasing furniture, appliances or consumer electronics, can turn to one small cap Canadian stock that has been delivering handsome returns to shareholders for years. It’s called goeasy (GSY.TO, EHMEF).
The pitch is that it is a “… leading full-service provider of goods and alternative financial services that provides everyday Canadians with a chance for a better tomorrow, today.”
Why wait, when you can live better right now?!
The $2.7 billion market cap, Ontario-based company was founded in 1990. Revenue has grown every year since 2001 and has been up double digits every year since 2013, with the exception of 2020 (thanks, pandemic).
In the early years goeasy’s growth came from its first division, easyhome. Easyhome is Canada’s largest lease-to-own company and helps customers acquire brand-name household furniture, appliances and electronics from both corporate and franchise stores, and pay for them under weekly or monthly leasing agreements.
Revenue in the easyhome segment hit $143 million in 2020 and generated operating income of $31.1 million on $49.4 million in leased assets. To be clear, the fixed annual interest rate is far from cheap at 29.99%. I guess that’s what unsecured, non-prime borrowers pay these days. (My inner voice is screaming for these clients to just say “NO” to financing that comfy couch – go get a cheap used one you can afford!)
Growth in the easyhome segment hit a brick wall in 2009 and 2010 during the financial crisis when revenue topped out at around $170 million. The segment has shrunk since, and 2020 wasn’t the best of years due to the pandemic. But this segment is stable and operating margins are attractive.
The real growth engine is a newer segment, which is in the earlier stages of growth. The company moved quickly during the financial crisis and launched its second segment, easyfinancial, a non-prime consumer lending company that bridges the all-too-massive gap between traditional lenders and predatory payday lenders.
Financing options include secured or unsecured installment loans ranging from $500 to $45,000, with interest rates starting at 19.99%. Repayment terms are nine to 60 months for unsecured loans, and up to 10 years for secure loans.
The easyfinancial segment has been expanding and offers an omni-channel model so customers can complete transactions through a national branch network of 266 locations, online through a digital application platform, or through call centers. The company’s investor relations materials tout the quality of goeasy’s risk analytics technology, which helps avoid bad loans and facilitates loan offerings at the point of sale through third-party merchants. In 2020, revenue in this segment hit $510 million (78% of total revenue) on gross consumer loans of $1.25 billion.
The bottom line is that sales in the easyfinancial segment have soared in recent years while sales in the easyhome segment have declined. All in, revenue in 2020 of $653 million was up 7%, while adjusted EPS of $9.21 was up 109%. Sales growth slowed from 21% in 2019, but it’s hard to argue with the numbers given how hard 2020 was. goeasy pays a dividend with a forward yield of 1.3%.
The stock has been a relatively steadfast performer, albeit with the normal pullbacks and consolidation periods over the years. The most dramatic retreat was during the pandemic (no surprise) when shares fell a demoralizing 74% from their pre-pandemic high of 80.6. However, the stock climbed back steadily, broke out to new highs last November, and has been climbing steadily since. No recent pullback has breached the 50-day moving average line.
Canadian Small-Cap Stock #2: Descartes Systems (DSGX)
Note: All prices stated below are in U.S. Dollars, unless otherwise noted.
It’s hard to argue against a stock that’s performed as well as Descartes Systems (DSGX) over the last decade, especially given that the company still has a market cap of just $7 billion. Sure, there have been some choppy periods here and there. But most dips in the stock have attracted buyers who seem all too eager to snatch up shares of the Ontario-based logistics management software company.
The big-picture trend powering the stock is demand for supply chain software solutions. That demand stems from increasing complexity in global trade networks that are often disrupted, which slows down delivery time. Descartes helps customers overcome these challenges by offering faster deliveries to market by using a proprietary logistics data and analytics platform that automates and optimizes otherwise inefficient global logistics processes.
Products range from connectivity and document exchange, route planning and inventory and asset visibility, to wireless dispatch, rate management and warehouse optimization. These solutions help customers manage the flow of data and documents that track and control inventory, assets and people in motion, whether they interact with high- or low-tech partners.
In short, customers come to Descartes because they face immense logistics challenges, and the company can plug them in to the world’s largest multi-modal logistics network. They stay because Descartes gets the job done and offers partners and solutions that help clients differentiate themselves from the competition.
Revenue has been up double digits in 13 of the last 14 years, including up 16% (to $275 million) in 2019 and 18% (to $326 million) in 2020. Adjusted EPS has been positive since 2006 and has been up double digits every year since 2015, including up 14% (to $0.40) in 2019 and 12% (to $0.45) in 2020.
Descartes’ stock has a tendency to trade above its 50-day line on a weekly chart. Pullbacks to that moving average line are typically in the -7% to -15% range. The rare correction is typically in the -20% to -30% range, and there have been fewer than 10 of these since 2013. The biggest by far was during the pandemic, when DSGX fell 50% from an all-time high of 47.4.
The stock rebounded quickly and broke out to new highs in June 2020. Since then, DSGX has tended chopped steadily higher, albeit in a slightly wider range than is normal. This trading pattern suggests buying at or below the 50-day line is wise in the near term. Longer term, I expect continued strong performance from DSGX.
Canadian Small-Cap Stock #3: Lightspeed (LSPD)
Note: All figures for Lightspeed are in U.S. dollars, unless otherwise stated
Technically speaking, Lightspeed (LSPD), which now has a market cap of $17.6 billion, isn’t a small-cap stock anymore. However, I’ve been following this company since it had a market cap under $2 billion and I know many readers have bought and held because of my coverage. Plus, growth is still terrific, so those of you interested in both small- and mid-cap Canadian stocks may well be interested in LSPD now.
The backstory is that Lightspeed is based out of Montreal, Canada and has developed an omnichannel shopping experience for small businesses that allows merchants to adopt multiple software solutions (on-premise point-of-sale (POS), cloud, etc.) to meet the evolving demands of their customers. The platform integrates with suppliers for on-demand inventory management, provides financial solutions to accept payments and provide capital, and offers data analytics to help merchants generate extra revenue and margins.
Lightspeed’s core market of small businesses are often forced to use a hodgepodge of solutions that don’t speak well together. In contrast, Lightspeed’s platform can do the heavy lifting, encompassing point-of-sale, loyalty, customer relationship, order management, inventory management and payment functions. Management continues to release new features to enhance the most complex challenges customers face.
Lightspeed grew revenue by 36% (to $78 million) in 2019 and by 56% (to $121 million) in fiscal 2020. It is not yet profitable, though adjusted EPS improved from a loss of -$2.33 in 2019 to a loss of -$0.55 in 2020.
Looking forward, Lightspeed should grow revenue by around 103% this year, implying sales of $450 million, then grow another 38% next year. Acquisitions are helping the growth trajectory. Two recent acquisitions include Ecwid and NuORDER
The company went public on the Canadian stock exchange in March 2019, then debuted on the NYSE in September 2020 at around 30. Since trading in the U.S. began, shares of LSPD have more than quadrupled. The early run lasted from October through February. After pulling back as low as 55 this May, it has since more than doubled. Buying on dips and holding for the long term should work out well.
One More Hot Canadian Small-Cap Stock to Consider
I recently added another Canadian small-cap stock to Cabot Small-Cap Confidential, where we have an average gain of better than 200%.
This unknown company works with all the big streaming platforms to bring content to consumers around the world. Current partners include Netflix (NFLX), AppleTV+ (APPL), HBO Max, Amazon (AMZN) and Peacock (CMCSA).
Revenue was up double-digits in 2020 and is tracking very strong in 2021 as well.
As always, if you’re interested in getting my research on the best small caps in the world, start your subscription to Cabot Small-Cap Confidential by clicking here now.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
*This post has been updated from an original version, published in 2019.